The second round of NAFTA talks has come and gone. Inside the negotiating rooms, officials faced a mountain of work but reports indicate that cooperation among the three countries has been pretty good. Outside the rooms, there are a lot of misunderstandings, some intentional and some based on the arcane complexity of trade negotiations. Make no mistake, no country arrived at these negotiations with a short list of three or four tweaks or quick wins. All parties intend to conduct a deep dive on at least 28 different issue areas. Whether you call it a renegotiation or modernization, the NAFTA parties have a challenging workload ahead of them.

It all begins with text. Canada and Mexico have been putting forward text proposals in a number of negotiating areas. The United States has been slower off the mark but this will pick up. Especially interesting is that the U.S. has not yet suggested any text on such hot-button issues as Chapter 19 dispute settlement, investor-state dispute settlement or automotive rules of origin. The working text that emerges (probably in Round 3 or 4) will be a mash-up of existing NAFTA and TPP texts with square brackets indicating areas of disagreement. Early on most of the text will be square brackets. There will also be some creative additions to cover new trade areas not considered in the other two agreements.

At this stage, almost all bargaining is competitive. The media is doing a pretty good job covering these negotiations but some, pressured to write hot headlines, succumb to language about certain countries “playing hardball” and “digging in their heels.” At this stage of the game, everybody is playing hardball to the extent that all players are scoping out the extreme ends of their negotiating position sets. Trade-offs and concessions, should they come, will take place later. There is a chance that provisional settlements will be reached sooner on non-controversial areas such as support for small and medium-sized enterprises but these conclusions will be conditioned on a full agreement being reached across the board.

Resetting the clock. Very few people not employed by the Office of the United States Trade Representative are seriously talking about concluding these negotiations by the end of 2017. NAFTA watchers are tossing around various dates based on the timing of the Mexican presidential elections and U.S. congressional midterms. A number of pundits are resetting the deadline to the end of February (some even later). But, from an outcomes perspective, it is hard to imagine any of the negotiating parties accepting a deal that can’t be sold at home just for the sake of hitting a political target. More likely is a scenario where the negotiations go on hiatus for a period of time while politicians take care of business.

All dispute settlement is not created equal. Some mainstream reporting confuses Chapter 11, investor-state dispute settlement, with Chapter 19, dispute settlement in anti-dumping and countervailing duty matters. Both of these are areas that Canada has committed to defend but Canada might be willing to provide more leeway on Chapter 11. They did just sign a deal with the European Union with amended investor-state measures. On the other hand, since Chapter 19 applies directly to the ongoing softwood lumber dispute with the United States Canada insist on keeping these provisions unchanged.

The path forward. At this stage in NAFTA 2.0, the USTR team has the most difficult job because they have to satisfy deeply divided political masters. The White House wants a deal that reflects U.S. global toughness and expands its ability to impose punitive instruments against foreign traders. The Republican majority in Congress, while not made up of pussy cats, is also responsive to business interests who do not want to sacrifice existing supply chains in order to punish those who sell more goods to the U.S. than they buy. Mexico probably has the most at stake. Much of its economy relies on the provisions of the NAFTA, both as a source of foreign trade and investment and as a framework for domestic economic policy. Mexican voters are basing their decisions about who will be their next president by how well these individuals promote Mexico’s economic interest while preserving Mexico’s dignity against U.S. affronts. Meanwhile, Canada is likely to continue to be a helpful fixer in these negotiations by providing text proposals and analytic research but not being so helpful to the U.S. that they will accept any position without question.

Stay tuned for more NAFTA analysis from the Canada Institute throughout the negotiations. Don't forget to sign up for the Canada Institute newsletter.

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